Wednesday, 11 February 2009

Of course I get asked quite a lot, lately, is there any research on firm strategies in a downturn? And I have to say, the answer is (unfortunately) pretty much “no”.

There is a lot of research in the field of strategy on companies that are in trouble. There is also quite a lot of stuff on companies that operate in industries that are in decline, for instance because their business model is antiquated or their technology has been surpassed. But there is nothing, to the best of my knowledge, on what corporate strategy to follow if the whole planet is in decline…

Someone also asked me, the other day, do you know of any companies that do particularly well in a downturn? And actually, I realised, that’s not a bad place to start. I mean, perhaps we can learn something from these businesses; in terms of insights that other companies can also apply in their attempts to weather the storm. So let me give it a try. I am going to – quite cowardly – not present these deliberations in the form of insights or findings but in the form of questions. Questions you can ask yourself, as a company, to try to think of ways to improve your chances of survival whilst the world is in a downturn.

Be Morrisons (not Waitrose)

The first, fairly obvious, type of business that does relatively well in a downturn are the ones that offer products or services at comparatively low costs. Their price-quality ratio is low, relative to their direct competitors. For example, supermarkets like Morrisons, which compete on price, are currently showing much better numbers than a more upmarket quality provider like Waitrose. These companies always provided that type of price-quality ratio but now more and more customers put higher weight on the price aspect of the ratio, which makes Morrisons flourish.

It seems quite obvious but, nevertheless, it is worth thinking about. Is there anything you can do to offer your (potential) customers lower cost options (probably at the expense of some quality)? I am often a bit surprised by how reluctant businesses are to give up margin when times are tough. It seems many firms think they can’t afford to lower their margins because that’s the remaining source of income while customers are deserting them. However, fewer customers may desert you if you do lower your margins! You may even win a few. Moreover, many customers are willing to sacrifice quality for price, IF you give them the choice.

Be a shoe repair shop

But, as said, that’s the obvious one. One step further are the types of businesses that help companies extend the life of their current resources. Think of car part dealers or shoe repair shops. They actually grow during times of decline (as they are doing now)! People and companies are having their cars repaired rather than invest in a new one. Can you, as a business, think of a product or service that you can offer to help your clients get more out of their old shoes? Can you offer upgrades of existing technologies? Can you offer marketing services that extend the lifecycle of your client’s product?

Moreover, do you have clients that are like shoe repair shops and car part dealers. Or could you make them your clients and offer them something they might be interested in? After all, they can afford it, and probably could use some help handling their exceptional growth.

Be a business school

Finally, can’t you be more like a business school? Seriously. During the last (mini)crisis in 2001, for example, applications to London Business School’s full time MBA programme doubled. What better time to do an MBA then during a crisis? People figured that the opportunity cost of their time was now relatively low; it is not like you’re going to get a huge pay rise or bonus during the crisis years (unless you’re a City investment banker of course…).

Moreover, by the time that they graduate, about one and a half years later, the crisis may have largely blown over and they are in a superior position to catch the first wave. Hence, be more like London Business School; clearly that can never be bad advice.

7 comments:

Interesting thoughts. Froma small business perspective, I often hear the age old (unsupported) view of continuing to advertise/market/sell in order to grab market share. But I think that only works if the products/services fit the times. Maybe the shoe store should begin offering repairs as well, rather than simply bumping up their marketing spend.

I think the cost of going back to quality (in the case of waitrose) when times are good can be costly. But how would a senior management be able to steer the company towards a lower quality. they might have to alter the entire supply chain.Opening a repair job or exclusive dealer for repossessed cars can be a big hit.Doing an MBA seems an excellent advice. That's what exactly i am doing now. Also there is no better time to do an MBA than in a downturn. The case studies are immense. The challenges are overwhelming. It seems that MBA applications have multiplied now.

I'd add a couple of things. Become a pawnbroker. They are doing pretty well now, as over-leveraged people need access to instant cash. Of course, buying second hand LCD TVs when new ones will shortly cost the same is not a good proposition, but say jewelery and art/antiquest will still have some value - if not now, then once the crisis passes.

Of course, the big question is the extent of the crisis. If it's a "usual" recession, with say 12-18 montsh, more prudent businesses (i.e. not leveraged up in their eyeballs) can spend the time productive - similarly to the MBA, they can do cheaper R&D (cheaper as they don't have to compete with investment banks for top talent, the R&D facilities are also cheaper, the govt seems to provide some incentives too, and you can work on the research with universities more easily too, as every student will see it as an opportunity of at least "a" not "the", job).

If it will develop to a full-blown depression (funny, in those times they used depression in the same sense we use recession now. How do the euphemisms change with time), lasting say 5 years, then all the bets are off. I remember a story told to me about Bata, Czech industrialist famous for his shoes :). In the dark times of the Depression and deflation, he managed to persuade his workers to drop their wages, while also dropping the price of his shoes, and using the argument that the new salary buys exactly the same number of shoes as before. Whether the story is true or not, I don't know, but he was quite famous for trying to educate his workers (in the good social sense).

I think the key approach is to go back to the idea of strategy as dynamic. The needs of your customers have changed therefore you need to reappraise the situation holistically.

What are the new needs of the customer and how can you adapt your products or services to match this?

The lever market 'margin' should be one of LAST resort as it has unwanted side-effects (less profit, difficult to regain later on, price war etc). Rather, it is about keeping margin constant but reducing both the price and the cost in order to match customer requirements.

The recession IS a huge opportunity to gain market share (and I have seen research supporting this), provided you don't approach it in a 'business as usual' way.

If you keep your focus clearly on your customers and on your fundamental KPI's / Management Information, then it pays to keep the marketing machine going.

1. Regarding reducing the Margins. I think there is a more compelling reason why the margin are not reduced in turbulent times. What I am seeing now in most corporates is the shareholders / investors are pressing the Execs to maintain the margins. I know Execs in the city who would want to try out these innovative methods but a tight slap on the hand from a big investor stops everything !! What are your view about this ?

2. MBAs : Be LBS. I reckon this is a good business. However given the post MBA placements this year can we expect this 'industry' to continue blooming. Will the economy recover in 2 or 3 quarters ?Or a more basic question. Does the industry still prefer MBAs or do they want more home-grown generalist leaders. Again views invited.

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About this Blog

Freek Vermeulen is an Associate Professor of Strategy and Entrepreneurship at the London Business School. FREEKY BUSINESS probes what really goes on in the world of business, once you get beneath the airbrushed façade. It examines the people that run companies – CEOs, managers, directors – and dissects the temptations, the influences and the sometimes ill-advised liaisons and strategies of corporate life.